Bailout Du Jour: Commercial Real Estate Developers Line Up at the Taxpayer Trough

Commercial real estate developers are now approaching Congress for a bailout, saying that commercial real estate mortgage defaults are now rising rapidly. The developers have told regulators that because credit has tightened, they are having difficulty rolling over their loans when they come due. Commercial real estate typically uses mortgages of 3-5 years, especially during the construction phase, after which they roll them over to new mortgages, often with a different lender. The tight credit market, combined with rising default rates, is proving to be a perfect storm in the commercial real estate market.

Regular readers will recall that about two weeks ago, I mentioned here that Eric Hovde had predicted that commercial real estate would eventually result in another economic crisis, and another shoe would fall.

Eric Hovde: 3 New Shoes to Fall

Eric Hovde, one of the investment managers that I most admire, has predicted, along with Meredith Whitney of Oppenheimer, that there are additional shoes to fall that may create new risks in the financial markets. Whitney has predicted an additional 20% drop in residential real estate values in 2009. Hovde warns of the following shoes yet to fall in the near future:

1. Commerical Real Estate - as businesses begin to feel more and more of the effects of the recession, commercial real estate mortgages are showing starkly rising default rates. This growing risk could affect $4 trillion of commercial real estate loans during 2009.
2. Corporate Loans - As earnings continue to be revised downward in what could be an endless spiral, corporate debt defaults will continue to rise, business bankruptcies will rise, and the result will be growing risks to the financial system.
3. Municipalities - With the downward deflationary pressures on real estate values, property taxes will need to be revised downward to compensate. There is a delay of about 18-24 months before municipalities are hit with the lower tax revenues resulting from reduced property value assessments. This will result in significantly lower revenues to cities, counties, and state governments, and will lead to another round of lay-offs as government entities are forced to slash budgets and payrolls during 2009 and 2010.